How to Set Up PAYG Withholding in Odoo Payroll

PAYG (Pay As You Go) withholding is the tax you withhold from employee wages and remit to the ATO. As an employer, you're legally required to withhold the correct amount from every pay — based on the ATO's tax tables, the employee's tax file number declaration, and factors like HELP debt, Medicare levy, and tax offsets. This guide covers the full PAYG withholding setup in Odoo.

How PAYG withholding works

• You withhold tax from each employee's pay based on ATO tax tables
• The withheld amount is reported as W2 on your BAS
• You remit the withheld tax to the ATO with your BAS payment
• Employees see their withholding on their payslip and in their annual Income Statement (via myGov/STP)
• The withholding is an approximation of the employee's annual tax liability — they reconcile at tax return time

Step 1: Understand the ATO tax tables

The ATO publishes withholding schedules that tell you exactly how much to withhold:

• Schedule 1 — Regular employees — The main tax table for salary and wages. Includes columns for tax-free threshold claimed / not claimed, and HELP/SFSS debt.
• Schedule 2 — Back payments, commissions, bonuses — Different withholding method for lump-sum payments based on prior-year earnings.
• Schedule 3 — Actors, performers — Specific table for the entertainment industry.
• Schedule 5 — Tax table for seniors and pensioners — Higher tax-free threshold for eligible seniors.
• Schedule 15 — Working Holiday Makers — Flat rate (15% from $1 to $45,000, then marginal rates).
• Odoo's Australian payroll module has these tables built in. You configure which table applies to each employee via their contract and tax settings.

Step 2: Configure employee tax settings

Each employee's tax treatment determines how much to withhold. In Odoo, set these on the employee record:

• Tax File Number (TFN) — If not provided, withhold at the top marginal rate (47% + Medicare). Enter the TFN on the employee's private info.
• Tax-free threshold — Did the employee claim the tax-free threshold on their TFN declaration? If yes, the first $18,200 of annual income is tax-free (reducing withholding each pay).
• HELP/HECS-HELP debt — If the employee has a study loan, additional withholding applies once income exceeds $54,435 (2025-26 threshold).
• SFSS (Student Financial Supplement Scheme) — Similar to HELP, additional withholding above threshold.
• Medicare levy variation — Standard is 2%. Some employees have a reduction or exemption (e.g., Medicare Levy Surcharge exemption). Set accordingly.
• Tax offset claimed — If the employee has provided a withholding declaration claiming a tax offset (e.g., zone offset, dependant offset), reduce withholding by the offset amount.
• Residency status — Australian resident, foreign resident, or working holiday maker. Different tax tables and rates apply.

Step 3: Set up PAYG salary rules

The PAYG withholding calculation in Odoo is handled by salary rules:

• Go to Payroll → Configuration → Salary Structures
• Open the Australian salary structure
• Verify there's a PAYG Withholding salary rule
• The rule should use the ATO coefficient method or lookup table to calculate withholding based on: gross pay for the period, pay cycle (weekly/fortnightly/monthly), tax-free threshold (yes/no), HELP debt (yes/no)
• The formula: weekly withholding = (a × weekly earnings) - b, where a and b are coefficients from the ATO schedule
• For fortnightly pay: use the fortnightly coefficients, or calculate weekly and multiply by 2

Step 4: Handle special withholding situations

• No TFN provided — Create a rule that withholds at 47% + 2% Medicare = 49% of gross. No tax-free threshold. This is a strong incentive for employees to provide their TFN.
• Bonuses and commissions — Can be withheld at the flat "Plan B" rate (Schedule 2) or added to the regular pay and withheld at marginal rates. The method depends on payment frequency and amount.
• Lump sum payments — Back-payments, leave loading, and arrears may have different withholding methods. Check ATO Schedule 2.
• Working Holiday Makers (WHM) — Flat 15% on first $45,000 of income. Requires your business to be registered as a WHM employer with the ATO.
• Contractors — If a contractor hasn't provided an ABN, withhold 47% from payments under the "no-ABN withholding" rule. This isn't strictly PAYG withholding but uses the same remittance process.

Step 5: Configure the PAYG liability account

• The PAYG withholding salary rule should post to a PAYG Withholding Payable liability account in your chart of accounts
• This account accrues the withheld tax between BAS lodgement periods
• When you lodge your BAS and pay the ATO, you clear this account with a journal entry or bank payment
• The balance should match W2 on your BAS

Step 6: Report on BAS

PAYG withholding is reported on the BAS at two labels:

• W1 — Total salary, wages, and other payments subject to withholding. This is the total gross wages for the period.
• W2 — Amount withheld from payments at W1. This is the total PAYG tax withheld.
• In Odoo, these figures come from your payroll data. Run the payroll summary report for the BAS period.
• Cross-check W2 against the PAYG Withholding Payable account balance to make sure they match.
• If you also withhold from contractor payments (no-ABN withholding), include those amounts in W1/W2.

Step 7: Year-end reconciliation

• At 30 June, verify the total PAYG withheld for the year matches: the sum of W2 across all BAS lodgements, the total shown in your STP finalisation, the PAYG Withholding Payable account (should be zero or equal to the Q4 amount not yet remitted)
• If there's a discrepancy, compare payslip-by-payslip against the BAS figures
• Submit the STP finalisation by 14 July — this is the employee's Income Statement
• Employees use this to pre-fill their tax returns via myGov

Common PAYG withholding mistakes

• Using the wrong pay cycle coefficients — If you pay fortnightly but use monthly coefficients, withholding will be incorrect. Match the coefficient to the actual pay frequency.
• Double-counting the tax-free threshold — An employee can only claim the tax-free threshold from one employer. If they work two jobs, only one should have "tax-free threshold: yes".
• Forgetting HELP debt withholding — If an employee has a HELP debt and you don't withhold the additional amount, they'll get a surprising tax bill at EOFY.
• Not updating tax tables annually — The ATO updates withholding coefficients each 1 July. Use the updated tables from the start of the new financial year.
• Incorrect Medicare levy handling — Foreign residents are exempt from Medicare levy. If you withhold it from a foreign resident, they'll be over-withheld.